New Stark Amendments Affecting "Under Arrangements," "Percentage" and "Per-Click" Leases: Deadlines Approaching, Rumors Flying

Last fall a flurry of articles, alerts and announcements warned the health care industry of the impending demise of both physician-owned "under arrangements" as well as "percentage" and "per-click" leases.

The amendments to the Stark regulations, published in the 2009 Inpatient Prospective Payment System Final Rule (“2009 IPPS Final Rule”), revised the definition of “entity” to limit the ability of physicians to provide services to hospitals under arrangements and amended several Stark exceptions to prohibit rent payments based on either a percentage or a per-use formula in space and equipment leases. The Centers for Medicare and Medicaid Services (CMS) recognized that these changes would disrupt a number of existing relationships and thus delayed their implementation until Oct. 1, 2009.

In the months following the issuance of the 2009 IPPS Final Rule, some in the industry have reconfigured or unwound affected arrangements, others have made plans to do so, and a third group has been waiting in the hope that CMS will reverse its position.

Faint hope: a legal challenge, a new administration and a stakeholder session

The filing of a lawsuit challenging the amendments affecting under-arrangement transactions, a change in administration and the announcement of a stakeholders’ “Convener Session” to address the efficacy of the Stark law, have all provided hope to those in the waiting mode. Unfortunately, the lawsuit was recently dismissed (a ruling favorable to the government) and the change in administration has not yielded any revision of CMS's Stark policy. The upcoming Convener Session on the Stark law, in which Representative Stark and lawyers from Davis Wright Tremaine will participate, could provide useful suggestions for regulatory or statutory reform. Those suggestions, however, are not likely to result in any concrete changes before Oct. 1, 2009.

Consequently, the rumors that CMS or even Congress may intervene and delay the implementation of the Stark amendments in the 2009 IPPS Final Rule must be viewed with suspicion. While anything is possible, a delay in the rules affecting under-arrangement contracts and per-use and percentage leases is a long shot. Providers should develop a strategy for restructuring or unwinding relationships that are inconsistent with the Stark amendments in the 2009 IPPS Final Rule. Waiting for government to delay the Oct.1, 2009, implementation date is not a prudent course.

A summary of the revisions to the Stark regulations that go into effect on Oct. 1, 2009, is set forth below.

1. Services provided under arrangements: changes to the definition of entity

In the 2009 IPPS Final Rule, CMS changed the definition of entity to include both (a) the person or entity that “presented a claim” to Medicare for the designated health service (DHS); and (b) the person or entity that “has performed” the DHS (notwithstanding that another person or entity actually billed the services
as DHS).
 
By changing the definition of entity to include persons and entities that “perform” DHS, CMS effectively converted to “DHS entity” status any physician group practice or other organization that provides inpatient and/or outpatient services under arrangement with a hospital.

Consequently, any physician who maintains a financial relationship with that under-arrangement organization can make DHS referrals to the organization only if that financial relationship fits within a Stark exception. While it may be possible to structure a physician’s compensation arrangement with an under-arrangement organization to satisfy a compensation-arrangement exception, only under limited circumstance will a physician be able to hold ownership or investment interests in an under-arrangement provider.

Given these changes, most physicians involved in under-arrangement relationships with hospitals are confronted with the choice of either (a) divesting their ownership or investment interests in the under-arrangement organization, or (b) restructuring the under-arrangement relationship. If physicians choose to restructure their under-arrangement relationships, they should do so by Oct. 1, 2009.

2. Percentage-based compensation and unit-of-service (per-click) payments in space and
    equipment leases

As part of the 2009 Final IPPS Rule, CMS also narrowed the circumstances under which percentage and per-click compensation are permissible. More specifically, CMS revised the office-space and equipment-lease exceptions, as well as the fair-market value and indirect-compensation arrangements exceptions to prohibit the use of both percentage-based compensation formulae and per-click rental payments.

Thus, a joint-venture entity owned by physicians that leases equipment to a hospital may not receive a per-use rental payment if the physicians refer patients to the hospital, prompting the use of the leased equipment. Similar limitations apply to the lease of office space or other real property. As noted above, these revisions go into effect Oct. 1, 2009.